After the New York State Appellate Division reversed the Tax Appeals Tribunal’s earlier decision denying a sales tax refund of over $100 million, the Tax Appeals Tribunal has now remanded the case for a further hearing before an Administrative Law Judge to consider evidence of the funding of a pre-refund escrow account set up to facilitate repayment to customers of improperly collected sales tax. Matter of New Cingular Wireless PCS LLC, DTA No. 825318 (N.Y.S. Tax App. Trib., Mar. 8, 2018). 

Background. In order to resolve litigation claiming that New Cingular Wireless, now known as AT&T Mobility (“ATTM”), improperly collected and remitted sales tax on charges for Internet access, ATTM entered into a nationwide class-action settlement agreeing to reimburse its customers, including New York customers, for the overcollected tax by filing refund claims on their behalf. Escrow accounts were created to receive sales tax refunded by the states, with funds to be distributed to the customers by an escrow agent under court supervision. In states like New York that require a vendor to refund the overcollected sales tax to its customers prior to receiving a refund from the state, ATTM agreed to fund a pre-refund escrow fund. However, ATTM had not made any payments to the pre-refund escrow fund with respect to the overcollected New York sales tax before claiming the refund for New York customers. The Department denied ATTM’s refund claim on the grounds that the amounts had not been refunded to customers.

Prior Decisions. In July 2014, an ALJ upheld that denial, finding that, since ATTM had not repaid the tax to its customers, it could not obtain a refund, because Tax Law § 1139(a) provides that “[n]o refund or credit shall be made to any person of tax which he collected from a customer until he shall first establish to the satisfaction of the tax commission . . . that he has repaid such tax to the customer.”

A month after the ALJ decision, in August 2014, ATTM filed a motion to reopen the record, claiming that it had not previously funded the New York escrow account because the Department had informed it that the refund claim would nonetheless be denied on other grounds; that it subsequently did fund the New York escrow account; and that it could submit evidence establishing that the account had indeed been funded. The ALJ denied the motion, holding that the Tribunal’s Rules of Practice and Procedure, which are patterned after the New York Civil Practice Law and Rules applicable in New York State courts, only allow the record to be reopened for newly discovered evidence, and that this evidence was not considered “newly discovered” because it had not been in existence at the time of the original hearing. 

In February 2016, the Tribunal affirmed the ALJ on both grounds. First, it agreed that the record cannot be reopened for the admission of evidence that was not in existence at the time of the original hearing and only was created afterwards, and concluded that reopening the record would be contrary to the Tribunal’s mission of providing a fair, efficient, and final hearing system. On the merits of the refund claim, the Tribunal found that the language of Tax Law § 1139(a) requires actual repayment or reimbursement to customers before a vendor may receive a refund, and that the various agreements among the parties did not constitute a sufficiently legally binding promise to pay. Because it refused to reopen the record to allow evidence of the escrow account funding, the Tribunal did not address the question of whether that funding would be sufficient to satisfy the repayment requirement.

Appellate Division Decision. In August 2017, the Appellate Division reversed the Tribunal, finding that, on “the particular facts of this case,” it was an abuse of discretion for the Tribunal to deny ATTM’s motion to reopen the record. It found that requiring a new refund claim to be instituted could run up against statute of limitations objections, which would result in what the court described as a “$106 million windfall” to the Department. It also found that, pursuant to the terms of the global settlement agreement, ATTM had “unquestionably” assigned all rights in the refund amounts to the settlement class customers, and the federal court that had approved the settlement had both sanctioned the payments and retained supervision of the distribution of the refund to ATTM’s customers. The court granted ATTM’s motion to reopen the record, and remitted the case to the Tribunal for further proceedings in light of the evidence that the escrow account had indeed been funded, noting that the Tribunal had never reached the question of whether funding the escrow account constituted sufficient repayment to the customers under the Tax Law.

Tribunal’s Order on Remand. The Tribunal, following the direction of the Appellate Division, reversed the ALJ, reopened the record, and admitted into evidence the affidavit regarding the funding of the escrow account. It then determined that, under the Division of Tax Appeals’ “two-stage tax appeals process,” the matter needed to be remanded to an ALJ for consideration of the issue of whether funding the escrow account constitutes repayment and to resolve open factual issues.

The Tribunal found that because the original ALJ determination granted the Department’s motion for summary determination, it “necessarily determined that there were no material or triable issues of fact.” However, the Tribunal found that, at the least, the accuracy of the amount of the refund is still in issue, and while nullifying the original ALJ decision issued in July 2014, it determined that further administrative proceedings are necessary. The Tribunal acknowledged the direction of the Appellate Division that the process should not be “implemented in a manner that resulted in either a windfall to the [Department] or further (and unnecessary) delay in tendering the long overdue refund to which petitioner’s 2,100,027 customers are entitled,” but nonetheless determined that the factual issue must be resolved in the first instance by an ALJ. It remanded the case for assignment to an ALJ and to “be scheduled for hearing as soon as practicable.”


The Appellate Division’s decision was quite explicit in its view of the case: It found that sales tax had been improperly collected from New York State customers by ATTM, ATTM had acknowledged the overcollection and set up a mechanism to refund the tax under the supervision of a federal district court, and the customers had already waited long enough for their money, to which the Department was not entitled. Despite this strongly worded decision urging quick action, it appears that in the time after the decision was issued, the Department has not determined the accuracy of the claimed refund. While the Tribunal may have had no choice under its procedures but to remand for further factual findings, and its decision acknowledges the need for expeditious proceedings, it appears that this already long-standing matter may not be resolved very quickly